Chapter 8.1 Accounting Analysis

Question 1

Reports to analyze corporate performance

Answer 1

strategic report
stakeholder review
financial review
directors remuneration

Question 2

LSE listing req

Answer 2

IFRS and International Accounting Standards (IAS)

Many exchanges require additional disclosures like a 6 monthly interim report

Question 3

Describe non-current asset investments

Answer 3

Investments in associate companies

associate company created when share ownership 20-50%

subsidiary company created where share ownership lies above 50%

Question 4

What are non current assets

Answer 4

Assets intended to be sed by business for more than a year

Question 5

List intangible non current assets

Answer 5

Goodwill
Trademarks
Patents
Capitalised development costs

Question 6

List tangible non current assets

Answer 6

Property plant and equipment

Valued at net book value (NBV)

Question 7

Net book value formula

Answer 7

NBV= cost- accumulated depreciation

Question 8

What happens to freehold land over time

Answer 8

appreciates

Question 9

annual depreciation formula

Answer 9

(original cost- expected residual value) / expected useful life

Question 10

What are current assets

Answer 10

Assets held for conversion into cash:

Inventory
trade receivables
cash

Question 11

Describe inventory

Answer 11

raw materials
work in progress
finished goods

valued at lower of cost and net realizable value

Question 12

describe trade receivables

Answer 12

amount the company is owed on statement date

trade debtors
PREPAYMENTS

Question 13

What does equity consist of

Answer 13

Share capital and share premium account

Reserves

Question 14

What is meant by reserves and give 2 types

Answer 14

Amount belonging to shareholders that is retained by company

Revaluation reserve- created when company revalues assets from cost to market value

Retained earnings (profit and loss reserve)

Question 15

Describe current liabilities and give examples

Answer 15

Amount owed by company and due for payment within 1 year

• Trade payables
• accruals
• expenses not yet invoiced

Question 16

Describe non current liabilities and give examples

Answer 16

Amount owed by company and due for payment after 1 year

• Long term bank loans
• Bonds issued by company
• PROVISIONS eg doubtful debt

Question 17

Difference between capital and revenue expenditure

Answer 17

capital expenditure spent to buy non-current assets and reflected on balance sheet (purchase of PPE)

revenue expenditure immediately impacts income statement (wages, rent etc)

Question 18

What is FCF

Answer 18

Cash available after all expenses and reinvestments needed to maintain operating capacity of business have been made

Question 19

How to get from operating profit to FCF

Answer 19

• Add back non cash expenses such as depreciation
• Subtract any increase in current assets or decrease in current liabilities
• Add any increase in current liabilities or decrease in current assets

Question 20

What is enterprise cash flow

Answer 20

free cash flow to firm before considering payments to any debt and equity holders

Irrespective of capital strcuture

Question 21

What is equity cash flow

Answer 21

Free cash flow to equity. Measure of how much cash can be paid to equity shareholders of company after all expenses, reinvestment and debt repayment

Question 22

What is a subsidiary

Answer 22

Any company you have more than 50% control in

Question 23

How to consolidate accounts if subsidiary not entirely owned

Answer 23

100% of assets, liabilities, revenues and expenses of sub added

Minority interest in shareholders funds on balance sheet

Minority interest in income statement after income tax expense

Question 24

When would a company disclose a minority interest in the statement of financial position?

Answer 24

A subsidiary company is not fully owned by the group

Question 25

Which of the following is not a heading in the cash flow statement?

Answer 25

Dividends paid and proposed, it is the proposed part of this statement which makes this incorrect

Question 26

A company has an operating profit of £12 million. If raw materials increased by £4 million, receivables decreased by £2 million and accounts payable increased by £2 million, the operating cash flow would be:

Answer 26

£12 million

Question 27

Which of the following would appear on a cash flow statement?

Answer 27

Acquisitions and disposals

Question 28

The share premium account could be used in which one of the following situations?

Answer 28

A company does a capitalisation issue, NOT DIVIDEND

An acceptable use of the share premium account is to account for IPO costs and cover the nominal value of new shares issed via a capitalisation issue (bonus issue).

Retained earning would be used to cover the payment of a dividend if the profits for the year are not enough. An uncovered dividend.

Stock-splits do not impact the balance sheet.

Question 29

In which of the following financial statements would you find proceeds on issue of bonds and equities?

Answer 29

Cash flow statement

Question 30

Why is deferred taxation not on cash flow statement

Answer 30

Taxation heading in the cash flow statement shows physical cash paid in respect of corporation tax during the accounting period - not the deferred taxation which is an accounting adjustment. Cash inflows and outflows in relation to fixed assets are recorded

Question 31

Where is interest shown

Answer 31

Income statement

Question 32

Where in the financial statements would you find tax payable?

Answer 32

Statement of financial position

Payables, including tax payable, can be found in the statement of financial position within Liabilities.

TAX PAID is found in the statement of cash flows.

Question 33

The current ratio is typically used to measure which one of the following within a company?

Answer 33

Liquidity

Question 34

IMPORTANT; Which of the following is not part of shareholders’ funds?

Answer 34

Authorised share capital

ISSUED share capital is in the balance sheet - AUTHORISED share capital (the maximum the company is allowed to issue) is not in the balance sheet.

Question 35

Which of the following would NOT be found in an income statement?

Answer 35

Deferred tax liability

Deferred tax liability would be found on the balance sheet.

Question 36

Which would you NOT find as a current liability in a statement of financial position?

Answer 36

Interest paid - would be in cash flow statement

Dividends not paid IS A CURRENT LIABILITY

Question 37

A company has completed a 1:5 stock-split. Following the stock-split the most likely impact on the company’s Debt to equity ratio will be:

Answer 37

It will remain unchanged

Although the number of shares issued will increase, with a stock-split the overall value will remain unchanged. As the value of equity is unchanged then the debt to equity ratio will also remain unchanged.

Question 38

The company has produced its financial statements and have enclosed additional disclosures in the notes. Which of the following will LEAST likely appear in these notes?

Answer 38

The statement of investment principles

It CAN INCLUDE Explanation of this year’s profit/loss

Question 40

What are capital reserves

Answer 40

capital reserves include revaluation reserves and the share premium account.
The revaluation reserve arises from the upward revaluation of non-current assets, and the share
premium reserve arises when the company issues shares at a price above their nominal value.

Capital reserves are not distributable to the company’s shareholders in the form of dividends, as
they form part of the company’s capital base, although they can be converted into a bonus issue of
ordinary shares.

Question 41

What are revenue reserves

Answer 41

the major revenue reserve is the accumulated retained earnings of the
company. This represents the accumulation of the company’s distributable profits that have not
been paid to the company’s shareholders as dividends, but have been retained in the business.
The retained earnings should not be confused with the amount of cash the company holds or with
the income statement that shows how the retained, or undistributed, profit in a single accounting
period was arrived at.

Question 42

Look at additional info on pg 266 and 267